Federal Deficit Grows Deeper Than Expected

Congressional budget experts warned Tuesday that the government’s fiscal outlook is deteriorating, and they forecast deficits that will be deeper and last longer than the Bush administration is projecting.

Instead of the three-year, $322-billion shortfall predicted by the White House last month, the government will post four consecutive deficits totaling $452 billion, according to the Congressional Budget Office.

The main factor in recent months has been a sharp drop in federal tax collections, the biggest in percentage terms since special wartime levies were lifted in 1946. The falloff has been caused in large part by the effect of the stock market’s declines on payments of capital-gains taxes. At today’s prices, fewer shareholders are recording profits when they sell.

More red ink could flow if the economy grows more slowly than expected or if lawmakers approve new tax cuts, extend prescription drug coverage to Medicare participants or boost other spending.

The revival of deficit spending after four years of surpluses may increase the anxiety level of Americans already troubled by the residue of last year’s recession and the stock market’s big declines earlier this year. That, in turn, could affect the outcome of this fall’s midterm congressional elections, in which control of both the Senate and the House is up for grabs.

Recent polls suggest the economy has replaced terrorism as the issue of greatest concern to Americans. The incumbent president and his party typically get faulted in times of economic anxiety.

The backlash could be magnified this year if enough voters accept Democratic arguments that Bush and congressional Republicans mortgaged the Treasury and jeopardized Social Security by pushing through a 10-year, $1.35-trillion tax cut last year.

“This has got to be a concern to the White House going into the midterm election,” said Kim Wallace, chief political analyst for Lehman Brothers, the big investment banking firm. “It has a strong probability of being the leading factor in decisions made on Nov. 5.”

Bush and his fellow Republicans argue the initial stages of the tax cut eased the recession that was beginning just as the administration took office. They blame the deficits on the recession, the economic impact of the Sept. 11 attacks and the cost of the U.S. response to the terrorism.

The CBO’s new deficit calculations could increase pressure to rescind some of the future tax cuts approved by Congress last year, particularly those targeted at upper-income households. Similarly, those calculations will make it more difficult to win support for new spending initiatives.

The revised budget estimates reflect an unusually rapid decline in the government’s fiscal outlook. Early last year, CBO officials predicted the government would take in $5.6 trillion more than it spent from 2002 through 2011. On Tuesday, it said Washington would finish the decade only $336 billion ahead of the game.

Along with the stock market swoon, CBO officials attributed the shrinkage to the combined effect of the recession, the war on terror and the Bush tax cuts.

CBO Director Dan Crippen noted that even with the downward revisions, today’s deficits appear tame by historical standards. This year, for example, the agency expects a $157-billion shortfall, which is equivalent to 1.5% of the nation’s total economic output.

In 1983, the $208-billion deficit recorded during Ronald Reagan’s administration was equivalent to 6.0% of GDP.

“We don’t see deficits going on forever, and they’re relatively small compared with history,” Crippen said.

Some budget watchers were less sanguine.

The Concord Coalition, a watchdog group that advocates fiscal restraint, said the CBO figures should be viewed as a wake-up call to Washington.

“Much of the huge projected surplus turned out to be a mirage,” said Robert Bixby, the coalition’s executive director. “Proposals that once seemed affordable now add up to perpetual deficits and rising debt.”

Concern about the effect of the shortfalls on the Social Security system could prove potent as voters size up candidates in this fall’s elections.

Although the CBO’s new figures put the government back in the black by 2005, that calculation includes Social Security surpluses that some politicians want to put in a “lockbox” for debt reduction.

If Social Security funds were truly off-limits, Washington would record annual deficits until the year 2011, according to the CBO’s calculations.

Indeed, the ink had barely dried on the CBO’s budget revisions before Democrats and Republicans began assigning blame.

“We’ve gone from surpluses to deficits, from paying down our national debt to increasing it, from saving the Social Security surplus to spending it,” said Senate Majority Leader Tom Daschle (D-S.D.). He charged that Bush’s tax cuts caused 80% of the surplus shrinkage.

The White House was having none of that.

“The president believes the lesson from today’s CBO numbers is that Congress needs to hold the line on spending,” Press Secretary Ari Fleischer said near Crawford, Texas, where Bush is vacationing. “If Congress won’t do it, the president will do it for Congress.”

On Capitol Hill, Senate Budget Committee Chairman Kent Conrad (D-N.D.), said congressional spending initiatives did not contribute to the deficits reflected in the CBO projections.

“This is the president’s spending,” Conrad said. “This is the president’s tax cut. This is the president’s fiscal policy that has driven us right back into the swamp of deficits and debt as far as the eye can see.”

Democrats repeated their demands for a bipartisan “summit” to address the nation’s economic problems.

But while Democrats have been quick to blame the government’s fiscal decline on last year’s tax legislation, many have been less eager to advocate rolling back parts of the tax cut as a remedy.

“When they’re asked whether they would vote on rolling back the tax cut, they run for cover,” said House Budget Committee Chairman Jim Nussle (R-Iowa). “They know that’s not popular, and it would have a devastating impact on the economy.”